No easy road to get to M2M’s 'rosy future'

Fujio Matsuda, service manager for Hitachi Construction Management (HCM) calls it "the rosy future."

It’s that point in time when an M2M capability, integrated into a new product line, begins translating into better customer service, better efficiency, better machines and, ultimately, increased profitability.

The problem is getting there can often take years, during which time there is no appreciable return on investment, and, once you start with M2M, there’s no turning back.  HCM’s journey is a case point.

One of Japan’s leading manufacturers of heavy machinery for the construction and mining industries, HCM first embarked on its M2M journey in 2002, when it began installing M2M systems for machines in the Japanese market. Then, in 2005, it began installing them for the international market as well.

Today, it has more than 140,000 M2M-capable machines operating in 185 different regions and countries around the world, using either 2G and 3G cellular networks, or Orbcomm satellites in places like Australia where cellular communications are not practicable.

But getting to this point was not easy. And had HCM not untaken a number of initiatives during the long, unprofitable initial phase, “the rosy future” might have remained a pipe dream.

Three phases

Speaking at Telematics Update’s Data Business for Connected Vehicles Japan 2013 conference in Tokyo on May 16, Matsuda described the journey in three phases: the initial phase where there is high investment coupled with high running costs, and no return on investment; the middle phase where the first returns start coming in; and the third phase where the return on investment is greater than the outlays. In other words, the rosy future has been achieved.

He also outlined HCM’s “front-loading” strategy used to not just survive the difficult early phases, but to draw the break-even point “to the left” of the timeline. Matsuda’s comments at the conference were supplemented by a recent interview.

Where heavy equipment differs from trucking and logistics is that trucking firms will generally replace their vehicle fleets after only several years,while companies operating construction equipment replace their machinery one piece at a time,and only after a much longer period of time.

The idea behind HCM’s “front-loading“ strategy was to use M2M as a “trigger“ to get operators to re-engineer their business processes as if all of their machines were already M2M-enabled. “The principle of this strategy lies in managing both M2M- and non-M2M-equipped machines at the same level,” Matsuda said.

By combining the information being provided by M2M machines with the manufacturer’s existing databases and analytics tools – read “Big Data” – these new insights will start generating value for customers early, helping them work smarter, minimize downtime and reduce unnecessary inventory by knowing which components will likely need replacing or even redesigning. “By increasing customer satisfaction, you will contribute to profitability,” Matsuda said.

At the end of the day, having complete information is vital for both the customers’ M2M-enabled and non-M2M machines. “When maintaining machinery, the most important thing is that you have to understand what kind of repair and maintenance it’s had,”Matsuda said.“By having both M2M- and non-M2M-equipped machines use systems and workflows that leverage M2M’s merits, the investment for M2M should be utilized to its maximum potential.”

PHASE I 

When HCM first decided to commit to M2M, everyone was excited, according to Matsuda. “‘Oh, wow! We’re going to do M2M!’” he recalled. “We dreamed of a rosy future when we thought of all the data we’d get in real time, and how we could combine that with other data and do a lot of things to increase customer satisfaction and also profitability. But then the reality started setting in, and we realized we had a long road ahead of us. Just because we started M2M doesn’t mean we suddenly feel the benefit.”

The reality is that during the first phase, the manufacturer is going to be saddled with significant running costs for the M2M capability without any immediate return on its investment. “At this stage, we are beginning to feel the pain of expensive costs,” Matsuda said. “For instance, we have to pay for the telecommunications costs, and if the CEO changes, he may be wondering, ‘Why are we spending so much money on this?’

“During the first phase, the costs are going to vary depending on the number of systems that have to be supported. The more units operating in the field, the more cost accrues in terms of both initial cost and running costs. These include telecommunications costs and costs for data storage.”

The big problem is that construction and mining equipment typically has long service lives, and so the number of M2M-enabled machines increases only gradually. “If a machine’s service life is ten years, then it will take ten years for all the machines to have M2M,” Matsuda said.

But even if you can’t recover any profit during this initial phase, Matsuda pointed out that once the M2M devices start reporting information back, the manufacturer starts getting valuable, previously unavailable insights into their machines performance. 

“If there is any malfunctioning, you can take proactive action, so there is that sort of benefit, though a very small one,” he said. “At this time, you have to make a good foundation. If you don’t do anything at this initial stage, I’m afraid you may never reach the break-even point. You need to adapt existing machines to business processes oriented to M2M machines and their future use of M2M.”

PHASE II

The middle phase begins when returns on investment start coming in to a level that approaches the initial investment and running costs. Much of this occurs from maintenance and parts purchases, but also when older machines are replaced by new M2M-equipped machines.

According to Matsuda, the strategy for the second phase needs to center on fine-tuning and optimizing the business processes. Matsuda, for example, recommended performing plan-do-check-act (PDCA) cycles, using quantitative and qualitative key performance indicators (KPIs) on the customers, their requirements and usage in order to structure the best solutions for service and maintenance.

Quantitative KPIs would include measuring sales order rates for parts and maintenance by comparing the sales and service patterns for existing machines without M2M, existing machines with retrofitted M2M and machines manufactured with M2M. Understanding the difference in patterns will give the manufacturer insight and access to additional servicing and sales.  

Qualitative KPIs primarily center around working time or measuring improvements in business efficiency and the quality and accuracy of work – by comparing it to what it was prior to system implementation. “Working time might sound quantitative,” Matsuda said. But "it also has a subjective aspect – whether work is actually easier after deploying the system. There is also the question of quality and accuracy of the work.”

PHASE III

Eventually, the customers’ non-M2M machines will either get replaced by M2M-equipped ones or be retrofitted with an aftermarket M2M capability. At that point, the investment outlays will be exceeded by profits. But that doesn’t mean that the manufacturer can put his feet up. “This is the stage where business needs to be standardized and completed,” Matsuda said.

By now, a massive amount of M2M data has been gathered, which allows for more sophisticated marketing and sales activities, as well as a better control of inventory. By linking M2M data with information of current businesses, new perspectives can be found.

According to Matsuda, HCM has yet to fully reach the rosy future, but it is getting there. What’s more, the market for M2M machines continues to grow. “I expect the market to saturate at a certain point in the future, but the number of M2M-equipped machines is steadily increasing at this point,” he said.

He also pointed out that the potential uses of information increase on a daily basis. “By this, I am not simply referring to the potential of individual, isolated information, but to the possibility of new potentials which can be created by combining various [kinds of] information.”

(For more on telematics in Asia, see Telematics opportunities in Southeast Asia.)

Heavy equipment versus commercial fleets

Besides heavy equipment, the other industry best suited for widespread M2M adoption is logistics and trucking. The main difference, says Fredrik Callenryd, business analyst with Scania Fleet Management, is that the systems they use put much greater emphasis on providing automated driver assistance in order to increase fuel efficiency and making “smarter drivers.” 

“With fleet management, the vehicles change owners after four or five years,” Callenryd said. “The first owner has the biggest interest in fleet management. The second owner’s interest in M2M is different, but I think that, as prices comes down, it will increase. We are trying to focus much more on development of services for the second owner. I think that in the coming years you will see a great trend going forward for pay-as-you-use schemes, where operators are much more interested in making sure they have that ability to transport goods, rather than actually owning the vehicles themselves.”

(For more on commercial fleets, see New markets for fleet telematics, part I and New markets for fleet telematics, part II.)

But in another respect, the two industries resemble each other. By now, all of Scania’s vehicles operating in Europe have M2M. In other regions, M2M penetration is spreading, but two things are slowing down adoption: regional legal issues regarding telecommunications and the difficulty of getting users oriented towards M2M.

“It’s no longer about the cost of getting the information back,” Callenryd said. “It’s much more about changing organizations and the way you’re doing business. That is taking time because people have to start working in a new way. They’ve been working in the same way for the last 20, 30 years, and they say, ‘Why should we change?’ It’s a hard thing.”

Brendan McNally is a regular contributor to TU. 

For all the latest telematics trends, check out Telematics Japan/China 2013 on Oct. 8-10 in Tokyo, Telematics Munich 2013 on Nov. 11-12 in Munich, Germany, Telematics for Fleet Management USA 2013 on Nov. 20-21 in Atlanta, Georgia, and Content and Apps for Automotive USA 2013 on Dec. 11-12 in San Francisco.

For exclusive telematics business analysis and insight, check out TU’s reports: Telematics Connectivity Strategies Report 2013The Automotive HMI Report 2013Insurance Telematics Report 2013 and Fleet & Asset Management Report 2012.

 


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